Employment Contract

Employment Contract: the most fundamental document between employer and employee

Every other people-related document (a severance agreement, a restrictive covenant, a garden leave clause) depends on what the employment contract said in the first place. Get it right at the start and the difficult conversations later become manageable.

This page covers the clauses employers most often get wrong, and flags where the position changes between the US, the UK and Canada.

Who needs one

• Every employer in the UK and Canada, for every employee
• US employers, even where employment is at-will: a written agreement is still where you set confidentiality, IP assignment and restrictive covenants
• Growing technology businesses hiring people with access to clients, code and commercial information
• Anyone relying on an offer letter and a template inherited from a previous company

The first question: is employment at-will?

This is the fault line between the three jurisdictions, and it changes how every other clause behaves.

Jurisdiction note: employment at will

US: At-will employment is the default in almost every state (Montana is the notable exception once an employee passes a probationary period). Either side can end the relationship at any time, for any lawful reason, with no notice. There is no federal statutory notice period. Your contract should say expressly that employment is at-will, and avoid language elsewhere in the document, or in a handbook, that implies a fixed term or a promise of continued employment.

UK: Employment is not at-will. Statutory minimum notice applies, and employees with two years' service gain protection from unfair dismissal.

Canada: Not at-will. Statutory minimum notice applies under provincial employment standards legislation (or the Canada Labour Code for federally regulated employers), and common-law reasonable notice applies on top unless the contract validly limits it.

The clauses that matter most

1. Restrictive covenants

A restrictive covenant tries to prevent an employee from doing something after their employment ends: dealing with former customers, working for a competitor, or setting up a competing business.

The trap everywhere is overreach. A covenant must go no further than necessary to protect a legitimate business interest. An example of what fails: preventing an employee who has not worked with a client in years from dealing with company clients. It protects nothing real. An unenforceable covenant protects you not at all.

Jurisdiction note: non-competes

US: The FTC's 2024 rule banning non-competes was vacated by a federal court in Ryan LLC v. FTC, and in September 2025 the FTC dismissed its appeals, accepting that outcome. There is no federal ban; the FTC has said it will pursue individual cases under Section 5 instead. Enforceability is a state-by-state question. California, North Dakota, Oklahoma and Minnesota impose near-total bans on employee non-competes. Colorado, Illinois, Washington, Oregon, Maine, New Hampshire, Rhode Island, Virginia and Massachusetts restrict them by salary threshold or other conditions. Check the position in the state where the employee actually works, and re-check it. These rules change most years.

UK: No statutory ban. Covenants are enforceable only so far as they are reasonable in scope, duration and geography to protect a legitimate business interest.

Canada: Ontario prohibits employee non-competes under s.67.2 of the Employment Standards Act (Working for Workers Act 2021), with two exemptions: executives (C-suite, president, vice-president level) and non-competes given in connection with the sale of a business. Most other provinces have no statutory ban, and the common-law reasonableness test applies. Courts across Canada are notably hostile to non-competes and much more receptive to narrower non-solicitation clauses.

The practical takeaway is the same in all three: a narrow non-solicitation clause that holds up beats a wide non-compete that does not.

2. Notice periods

A notice period is the time between notice being given and employment ending.

Jurisdiction note: notice

US: No statutory notice for individual terminations under at-will employment. The WARN Act does require 60 days' advance notice of a plant closing or mass layoff, generally for employers with 100 or more full-time employees, with specific thresholds for what counts. Several states have their own "mini-WARN" laws with lower thresholds.

UK: Statutory minimum notice under s.86 Employment Rights Act 1996: one week for one month to two years' service; one week per complete year between two and twelve years (five years' service means five weeks' notice); twelve weeks at twelve years or more. Contractual notice can be longer, never shorter.

Canada: Statutory notice is provincial. In Ontario, the ESA gives one week per year of service to a maximum of eight weeks. Separately, ESA severance pay may apply where the employee has five or more years' service and the employer's payroll is $2.5 million or more, or where 50+ employees were severed on a permanent business closure: calculated at one week's regular wages per year of service, capped at 26 weeks.

On top of the statutory floor, Canadian employees are entitled to common-law reasonable notice, which is frequently far longer, often measured in months rather than weeks. A contract can limit notice to the statutory minimum, but only if the termination clause is drafted correctly. This is where Canadian employment contracts most often fail.

Canada: the Waksdale problem

In Waksdale v Swegon North America (2020 ONCA 391), the Ontario Court of Appeal held that if any part of a termination clause breaches the ESA, including a "for cause" limb the employer never relies on, the entire termination clause is void, including the "without cause" part. The employee then falls back on common-law reasonable notice.

The practical effect: a single badly drafted sentence in a termination clause can turn an eight-week statutory obligation into a claim for many months' pay. Canadian termination clauses should be reviewed against current case law, not inherited from an old template.

3. Garden leave

Garden leave means the employee stays at home during their notice period. They continue to be paid and receive full contractual benefits, but are not permitted at the workplace.

It is most useful when someone is leaving for a competitor: time at home means the information they hold goes stale.

Two cautions apply everywhere. The period must be fair and not keep the employee out of the market too long, or a court may shorten it. And where restrictive covenants also apply, the covenant period should account for time spent on garden leave: if a non-solicitation covenant runs three months and the employee spends one month on garden leave, the covenant should bite for only two months afterwards.

Jurisdiction note: garden leave

US: Garden leave is far less common, and only works where there is a notice period to serve, which at-will employment does not create by default. Some states treat extended paid garden leave as a form of restraint subject to the same scrutiny as a non-compete; a few (Massachusetts, for example) effectively require paid garden leave as consideration for enforcing one.

UK: Well established, provided there is an express garden leave clause and, ideally, no right to work.

Canada: Recognised, but courts will scrutinise it where it operates as a de facto restraint, and the paid period generally counts towards notice obligations.

4. PILON: payment in lieu of notice

A PILON clause lets you end employment immediately by paying the employee what they would have earned during the notice period, instead of them working it out.

Jurisdiction note: PILON

UK and Canada: This only works if there is an express PILON provision in the contract. Without one, paying instead of giving notice can itself be a breach, which can unravel your restrictive covenants at exactly the moment you need them. In the UK, PILON payments are subject to specific tax treatment; take advice on how the payment is structured.

US: Less relevant under at-will employment, where there is usually no notice period to pay in lieu of. Where a fixed-term or notice-based contract exists, the same principle applies: the right to pay instead of giving notice must be written in.

5. Termination without notice

Where an employee commits a serious act of misconduct (theft from the employer, for example), you may be able to dismiss immediately, if the contract covers the situation. No notice period, no PILON payment.

It is still essential to follow proper disciplinary procedures. Skipping the process is how a justified dismissal becomes an unfair dismissal claim in the UK, a wrongful dismissal claim in Canada, or a discrimination or retaliation claim in the US.

Jurisdiction note: the threshold for "cause"

Canada: The bar for just cause dismissal is notoriously high, and Ontario's ESA sets an even narrower standard ("wilful misconduct") for withholding statutory notice. A termination clause that conflates common-law "cause" with the ESA standard is one of the classic Waksdale failure points.

UK: Gross misconduct can justify summary dismissal, but a fair process is required to defend an unfair dismissal claim.

US: At-will employment means cause is not strictly required, but documenting the reason matters enormously for defending discrimination and retaliation claims.

6. Holidays and paid leave

Jurisdiction note: paid leave

US: There is no federal statutory minimum paid vacation and no federal requirement to offer paid time off at all. Entitlement is a matter of contract and company policy, with some state and city laws mandating paid sick leave specifically. State rules also differ sharply on whether accrued, unused vacation must be paid out on termination (California says yes; other states leave it to policy). Say clearly whether PTO is accrued, capped, carried over, or forfeited.

UK: The Working Time Regulations 1998 give 5.6 weeks' paid annual leave: 28 days for a full-time worker, pro rata for part-time. There are eight bank holidays in England and Wales, and these can count towards the 28 days; they are not automatically additional. Say which approach you are taking.

Canada: Provincial. In Ontario, the ESA gives two weeks' paid vacation, rising to three weeks after five years' service, plus vacation pay of 4% (6% after five years) of gross wages. Statutory holidays are separate and additional. Other provinces differ, so state the province the contract is governed by.

7. Confidentiality

Both employer and employee are subject to an implied duty of trust and confidence in the UK and Canada, and to comparable duties of loyalty in the US. During employment, that stops an employee from disclosing trade secrets or information the employer treats as confidential.

Once employment ends, the implied duty narrows sharply: it generally protects only information amounting to a trade secret, or so highly confidential it deserves the same protection.

An express confidentiality clause does two useful things. It deters, by reminding employees of their obligations. And it shows clearly what the business treats as a trade secret. What it cannot do is make something confidential that plainly is not: obvious or trivial information stays outside the clause, however it is labelled.

Jurisdiction note: US employers, do not miss this

Under the Defend Trade Secrets Act, 18 U.S.C. §1833(b), any agreement with an employee, contractor or consultant that governs the use of trade secrets or confidential information must include a whistleblower immunity notice: telling them they are immune from liability for confidential disclosures made to a government official or attorney for the purpose of reporting a suspected legal violation, or in a court filing made under seal.

Omit it and you lose the right to recover exemplary (double) damages and attorney's fees in a DTSA action against that person. The notice can be given directly or by cross-referencing a compliant policy. It applies to agreements entered into or updated after 11 May 2016.

There is no equivalent statutory notice in the UK or Canada, though UK whistleblowing protections under the Public Interest Disclosure Act 1998 mean a confidentiality clause cannot lawfully gag a protected disclosure.

8. Intellectual property

Jurisdiction note: who owns what employees create

US: Work created by an employee within the scope of employment is generally a "work made for hire" under 17 U.S.C. §101, owned by the employer. Patentable inventions are a separate question and normally need an express assignment. Include a present assignment of rights rather than relying on the doctrine alone, and note that several states (California Labor Code §2870 among them) limit how far an employee invention assignment can reach.

UK: Under s.11(2) Copyright, Designs and Patents Act 1988, the employer owns copyright in work created by an employee in the course of employment.

Canada: Under s.13(3) of the Copyright Act, the employer is first owner of copyright in work made by an employee in the course of employment, absent agreement otherwise. Moral rights cannot be assigned but can be waived under s.14.1(2): include an express waiver.

In all three, the position for contractors is different and far less generous. See the Consultancy Agreement and IP Assignment Agreement pages.

9. Benefits

Be specific. If the employee gets a company car, deal with who pays for insurance, tax, servicing and repair, and consider stating that if they lose their licence the car comes back. The same discipline applies to every benefit you offer: ambiguity in a benefits clause is discovered at the worst possible moment.

US employers should also be clear about which benefits are governed by an underlying plan document, since the plan, not the contract, usually controls.

10. Governing law

Jurisdiction note: which law applies

US: Choice of law and venue are set by state. Note that some states restrict an employer's ability to impose another state's law on a resident employee: California Labor Code §925 is the clearest example.

UK: English law with exclusive jurisdiction of the English courts is the standard position for a contract of employment performed in England.

Canada: Provincial. Name the province, and remember that employment standards legislation in the province where the employee works applies regardless of what the contract says.

Frequently asked questions

Do I need a written employment contract if employment is at-will? Yes. At-will governs how the relationship ends. It does nothing for confidentiality, IP assignment, restrictive covenants or benefits: all of which need to be in writing.

Can I enforce a non-compete? It depends entirely on where the employee works. It is banned outright for most employees in California, North Dakota, Oklahoma, Minnesota and Ontario, restricted by salary threshold in several other US states, and tested for reasonableness everywhere else.

How much notice do I have to give in Canada? The provincial statutory minimum is the floor: in Ontario, one week per year to a maximum of eight. Common-law reasonable notice sits on top and is often much longer, unless your termination clause validly limits it and survives Waksdale scrutiny.

Do bank holidays come on top of the UK's 28 days? Not automatically. The eight bank holidays in England and Wales can count towards the 5.6 weeks' statutory entitlement. Your contract should say which approach applies.

Am I required to give US employees paid vacation? No federal law requires it. Some states and cities mandate paid sick leave, and state rules differ on paying out accrued vacation at termination.

How Cloud Contracts 365 helps

Cloud Contracts 365 builds employment contracts from a guided questionnaire that asks where the employee actually works, then prompts you through the points employers in that jurisdiction get wrong: at-will language and the DTSA notice in the US, statutory notice and holiday treatment in the UK, and termination clause drafting in Canada. Every contract and variation sits in one place, so when someone hands in their notice, you can see exactly what you agreed with them, and when.

Ready to see it?

Book a demo, and we will show you how to issue employment contracts that hold up when they are tested.

 This page is general information about employment contracts and is not legal advice. Employment law is highly jurisdiction-specific and changes frequently, particularly non-compete rules in the US and termination clause drafting in Canada. Take local advice on your specific circumstances.